Money Management
November 11, 2024
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Probably, nothing could be worse than receiving a no for a business loan that you were counting on getting. It can be frustrating and discouraging - a nightmare even. But if you are in this situation, remember you are not alone.
In theory, getting a bank loan sounds pretty straightforward. You just need to approach a lender, present your needs, and then ‘boom’ you get a loan. However, nothing could be farther from the truth.
The truth is, before you get approved for that loan, the lender is going to need a lot before they give it to you. At the very least, very few lenders are willing to fund a business plan only. In addition, they need you to prove a healthy cash flow, creditworthiness, and much more. You need to prove that you can repay the loan.
So if you are looking into getting a business loan, here are the eight most common reasons why you may not be approved for the business loan that you are in need of.
Your business credit history proves your credibility. If a business credit history shows a lack of diligence and commitment in paying back debts, this could hurt your chances of being approved for a new loan.
This also applies to personal credit history as many small businesses - especially sole proprietorships with a business permit only - are tied closely to their owners.
A credit history tells the lender whether a business is diligent and committed to paying back its debts on time.
Your cash flow is top on the list of things that the lender wants to check when reviewing your application. Without healthy cash flow it becomes harder to prove that you can keep up with the monthly installments.
Therefore, even before sending in your application, you should take your time to determine if your cash flow can afford a new loan. One of the recommended ways to keep your cash flow in control is to do a cash flow analysis at least quarterly - if not monthly. This can help you optimize your cash flow before sending in your application.
Depending on the type and amount of loan you are applying for, you may have to meet the minimum time in operation requirement for that loan category.
In Kenya, the time in operation requirement for business loans ranges from three months to three years depending on the lender, amount and whether the loan is secured on unsecured.
Some Kenyan lenders will, nevertheless, finance a new business but will typically need some form of collateral to secure the loan.
The time the business has been in operation may determine the amount of loan you can qualify for, repayment terms, interest rate and structure and other loan terms.
If the lender strictly applies the minimum requirement of time in operation then your loan application may be rejected.
You may choose to wait until your business is old enough to meet this requirement, offer collateral to qualify for a secured loan or choose to take a personal loan if it serves your needs at the time.
LEARN MORE>> Business Loans vs Personal Loans: How Do They Compare?
Business loan applications will typically involve significantly more paperwork than personal loans.
On top of normal KYC documents such as your KRA PIN, residential address and National ID, you will be required to provide proof of business registration status, demonstration of stable cash flows, demonstration of future business viability as well as the loan guarantee/security if needed.
To prove the above, depending on your business type, you may need to provide several documents that help the lender determine whether you qualify.
Failing to provide information about your business that helps prove you are eligible to get a loan will most likely lead to your loan application being rejected.
It is also possible that it could also impact the interest rate the lender decides to charge you in the event you qualify but are deemed a high risk borrower - on account of not providing information that proves otherwise.
LEARN MORE: 5 Things the Bank Will Ask When You Need a Business Loan
Depending on the status of your business, a business plan may be an important factor in determining how eligible your business is for the loan you request.
Since a lender may be interested in getting proof of the future viability of your business, a business plan should provide them with revenue projections, typically for the entire loan tenure.
As such, depending on how well done your business plan is, the lender can make a determination on whether it is in a position to repay the loan - especially in the absence of collateral or if you have not been in business for long.
Some industries are listed as risky by lenders. This means that if your business falls in this category, it may be tough for you to secure a business loan. For example, industries with a historically high failure rate may be unattractive to most lenders.
However, if your business loan was rejected because of this reason, do not lose hope. Concentrate on lenders who specialize in your area.
Additionally, you can opt for other routes of funding your business including taking a personal loan.
Some lenders will require you to pledge an asset as collateral in order to get a business loan - especially new businesses. This is known as a secured loan. If you lack the right type of collateral or your collateral is not sufficient to cover the loan, chances are it will not be approved.
In many cases, small businesses do not have this collateral. This leads to many applications getting turned down. Alternatively, it forces the business owners to pledge personal assets such as residential houses, private vehicles, etc.
One of the main mistakes that most entrepreneurs make is to go with the first lender that pops up without exploring all your options. Or applying for a loan with your bank just because you bank with them.
The idea is to do your homework and find a lender that is the best fit for your business needs. Ideally, your first stop should be to evaluate the lenders in the community where your business is based. These lenders have experience and probably the programs to deal with the local projects.
Money254 understands how difficult it can be to find the right information as well as how time consuming it can be to access all potential lenders available to determine what business loan is best for you. We have done the research for you and created the business loans finder where you can compare business loans from over 35 trusted lenders in Kenya.
Getting a business loan approved by your lender might seem daunting. But the success or failure depends on how well you are prepared and the timing of the application.
So before you send in your application, carefully analyze your business, research and know your lender and ensure you have all the required paperwork. If you do this, you will have a higher chance of getting your loan approved
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